Interview with Europa Press

Interview with Luis de Guindos, Vice-President of the ECB, conducted by Sergio Rivas

23 July 2024

Last Thursday’s meeting seems to have left everything open with regard to September.

We based our decision on the data we received since the last monetary policy meeting in June. For inflation, those data are practically in line with our projections. However, there was some worsening in the data for economic growth, owing mainly to the political uncertainty following the European and French elections. That said, we decided to keep interest rates unchanged because we will have more information in September, and especially new macroeconomic projections, so we will be able to better reassess the monetary policy stance. Data-wise, September is a much more convenient month for taking decisions than July was.

When you talk about increasing confidence, aren’t you at the same time saying that you are not yet confident?

The current level of uncertainty is huge, so we have to be prudent when taking decisions. When we say that we want to have more confidence, we mean more confidence that at the end of 2025 inflation will be at our definition of price stability, which is an inflation rate of 2% over the medium term. That’s the key question.

In the meantime, we will continue to receive new data, such as wage developments, which we look at particularly closely owing to their potential impact on services inflation. Services inflation is at 4.1%, and it is currently the component of inflation that is proving more difficult to bring down. But most of all, we will have new macroeconomic projections in September, and it will be crucial to see in those projections that inflation is steadily converging towards 2% over the medium term.

Do you need all the data, and especially wage data, to be moving in the right direction to gain that confidence?

Wage data are important, but we receive them with a time lag. In September we will have another two months of data on inflation and underlying inflation, but the new macroeconomic projections will be the most important. They are produced on the basis of the previous projections and include data such as the price of oil, exchange rate developments and changes in financing conditions. All of these data are added to the pot every three months to update our projections, which are obviously a crucial part of our future decisions.

Although the inflation rate in June was 0.1 percentage points lower than in May, services inflation and the underlying rate have stayed at more or less the same levels for months.

As we have already said, inflation will be around current levels until the end of the year. At the same time, all measures of underlying inflation are coming down, therefore the disinflation process will continue from the start of next year. We are already seeing that wages are starting to slow down. Our surveys show that firms expect wage increases to moderate, especially as of 2025, because the current rise in wages is closely related to regaining purchasing power as a result of past inflation. And if wage increases moderate, services inflation – which is most sensitive to wage developments – will moderate too, and that will enable us to reach our 2% inflation target at the end of next year.

The latest bank lending survey showed that demand for mortgages increased for the first time since 2022. What does that mean?

Financing conditions in the second quarter were broadly unchanged compared with the first quarter, although there are some specific changes. For example, we are starting to see an increase in demand for consumer credit and an improvement in demand for mortgages. But they are still very small changes.

What’s most important is that we have had several quarters during which financing conditions and loan demand have not deteriorated further. Our previous reports showed continued tightening throughout 2022 and much of 2023, coinciding with the rise in interest rates, then we saw some stabilisation at the end of 2023 which has continued this year. The tightening of financing conditions peaked almost three quarters ago, and banks are now expecting financing conditions to ease.

How might the complex geopolitical environment affect your decisions?

Political uncertainty in Europe has risen in the aftermath of the European elections. The European Parliament has now re-elected Ursula von der Leyen, which in my view is a confidence indicator as regards stability. But we will have to see what the composition of the new European Commission is.

In France, the outcome of the elections was a parliament with no majority, which may make it difficult to form a government. This has created additional uncertainty and has affected the French economy, which is the second largest in the euro area.

Overall, the uncertainty leads to much more cautious and prudent decision-making, because everything is much less clear. And when you’re in a dark room and can’t see, you try to move more slowly so that you don’t break anything.

In the case of France, with its fiscal situation, is there concern about the stance of the new Government?

Without getting into the specific situation of any one country, what is important is that the new fiscal rules are applied. In September countries have to present their medium-term multi-annual plans, and in October they will have to present their budget plans for 2025. It’s very important that all countries respect and implement the fiscal framework we have given ourselves in Europe. It would be very bad if the fiscal rules were not respected, which were only approved six months ago. I hope it will be the case that all countries respect the new fiscal framework.

The Spanish Government has revised its forecasts upwards. How does the situation look to you?

The Spanish economy is experiencing above-average growth. It is expected to grow by around 2.5% [of GDP] this year, well above the projection for the euro area as a whole. This growth is driven by a boost in public consumption and a significant population increase. The population has grown by more than one million people in the last two years. And these people have entered the labour market, driving this economic growth.

However, with regard to future growth, it’s very important that competitiveness remains the foundation of growth in the economy. For this to happen, it’s crucial that productivity improves and that wage growth remains consistent with productivity so Spanish firms can continue to compete internationally. And this is what has been happening since Spain first achieved a surplus in the current account of the balance of payments more than ten years ago. Likewise, to ensure the economy remains on a competitive path it’s crucial that companies are not burdened with additional costs or uncertainty.

And the situation of Spanish banks...

Spain has a sound financial system that is able to provide credit in a resilient way. This is another pillar of the Spanish economy.

Are they prepared for a change in monetary policy and ready to compete for deposits when the ECB is withdrawing liquidity?

The improvement in the profitability of European and Spanish banks has reached a ceiling. We will see how it begins to decrease because the favourable factors, like rate increases, will fall away.

The lack of remuneration on deposits in Spain has mainly been caused by excess liquidity in the banking system, liquidity which the ECB is now gradually withdrawing. Previously the banks didn’t need to compete for liquidity, but this withdrawal means they will increasingly have to compete to attract deposits. At the same time, on the assets side we have indeed seen greater competition between banks in the area of mortgage and consumer loan offerings.

When will the ECB take a decision on BBVA’s takeover of Sabadell?

We have around two months since the takeover bid is communicated to the ECB, so it won’t take much longer. The decision will be based on solvency and prudential criteria and will be communicated to the entity.

Why are there no cross-border transactions?

We would like to see more cross-border transactions because we want to have a single banking market, and for that we need banks that operate across the entire euro area. The lack of cross-border transactions is fundamentally linked to the fact that the banking union is incomplete, even if there is a single supervisor. We don’t have a common deposit insurance scheme, for example. And it is also linked to differences in regulation and in national legislation, which make cross-border transactions much more complex than national transactions.

Are you confident that the new European Commission will make progress towards the banking union? What can you do? Are you optimistic?

For the ECB, completing the banking union is a top priority. The ECB is not the EU legislator, so what we can do is give our clear opinion about completing the banking union and the capital markets union, and also about the need for an agreement to create a single fiscal capacity in Europe. These three elements are necessary to complete the governance of Economic and Monetary Union.

Is the situation at Banco de España being discussed within the ECB?

The Deputy Governor of the Banco de España, Margarita Delgado, attended last Thursday’s meeting and actively contributed to the discussions as any other member of the Governing Council. But not having an officially appointed Governor is unusual, so we hope an appointment will be made by 10 September. Our general recommendation is that appointees should have experience in monetary or banking matters.

Is it an issue if someone moves from being a minister to being Governor of the central bank?

In Spain, appointing the central bank Governor is the prerogative of the Government. There is an implicit agreement that the party in power appoints the Governor and the main opposition party nominates the Deputy Governor. Personally, I think it’s important to respect such agreements as they are part of a country’s institutional architecture.

I was a minister and then became Vice-President of the ECB as part of the Executive Board. But the situation wasn’t the same, because the process for appointing members of the Executive Board and its functions are different. The Spanish Government nominated me as a candidate, but the decision was taken by the European Council, acting by a qualified majority, after consulting the European Parliament and the Governing Council of the ECB. So there were different bodies that took the decision. And by definition, the functions of the Executive Board concern the entire euro area. However, many central banks fulfil tasks at the national level. For example, the Banco de España has to advise the Government and produce appropriate reports and research on the economic situation and the economic policy of the Government with independence of judgement.